Thursday, May 21, 2009

U.S. Rescue Aid Entrenches Itself

Posted in the Wall Street Journal by DAMIAN PALETTA, DAVID ENRICH and DEBORAH SOLOMON:

Within a few weeks, some of the nation's biggest banks will start disentangling themselves from the government's grip by repaying billions in federal bailout dollars.

But the moment, a symbolic bookend to a turbulent period, will likely be overshadowed by a parallel phenomenon: Many of the other emergency measures created to prop up the financial system are developing an air of permanence.

As such, the move to repay funds from the Troubled Asset Relief Program might represent not the beginning of the end, but rather the end of the beginning.

"There will be a time when we will be able to come to you and say 'This is how the unwinding process will work,' " Treasury Secretary Timothy Geithner told a Senate hearing Wednesday. "But it is too early to do that now."

On Wednesday, President Obama signed a law extending higher deposit-insurance limits through 2013. The Federal Deposit Insurance Corp. and the Treasury are developing public-private partnerships to help banks purge bad assets and the Fed on Tuesday agreed to expand a liquidity facility to accept high-quality commercial-mortgage backed securities.

Government officials remain concerned about the fragility of the financial sector. Their hesitance to fold these programs, and the financial industry's willingness to keep using them, has made it harder for regulators to re-establish a sense of market discipline, government officials say.

"The longer they exist, the more markets will depend on them," Sen. Richard Shelby (R., Ala.) said at the hearing. "As a result, it is very likely that the greatest challenge posed by this financial crisis still lies ahead."

Goldman Sachs Group Inc., J.P. Morgan Chase & Co., Capital One Financial Corp., U.S. Bancorp and Morgan Stanley are among those in discussions with regulators about repaying the government's TARP investment. Treasury officials could allow a batch of banks to begin repaying the money around the week of June 8.

Banks will have to prove to regulators they are on solid footing and can issue debt without government assistance. After the first group, the Fed is expected to recommend to Treasury on a monthly basis that another batch of banks be permitted to repay TARP money.

There mightn't be a rush for the exits. Just five of the roughly 45 federal thrifts that received money under TARP have asked to repay the money, a spokesman for the Office of Thrift Supervision said.

Edward J. Wehmer, chief executive of Wintrust Financial Corp., a $10.8 billion bank holding company that has received $250 million in aid, views the funds as "cheap capital."

He doesn't like rules imposed by Washington after the program began, particularly executive-compensation limits, but Mr. Wehmer does like how the government capital is helping his Lake Forest, Ill., company expand in a tough operating environment. He doesn't expect to repay the funds until late this year.

"Until the economy is back and banks stop closing, they're going to need to provide the support to make people feel good" about the system's stability, Mr. Wehmer said. But, he added, "it's hard to believe it could be a permanent situation."

The Treasury plans to use the repaid funds to pump money into other institutions, including smaller banks and insurance companies.

Banks with assets under $500 million, including ones that already have received government aid, will be able to get a larger chunk of government money. Firms can now apply for funds equaling 5% of risk-weighted assets, instead of the 3% allowed previously.

Mr. Geithner also said the government would extend for six months the deadline for small banks to form a holding company in order to qualify for government aid.

The Treasury's capital injections into hundreds of banks have assumed immense symbolic importance. In dollar terms, though, they represent a sliver of the U.S.'s intervention in the financial system.

Washington is on track to pump up to $14.9 trillion into the financial system through more than two-dozen federal initiatives, according to a Deutsche Bank report last month.

Of that, only $250 billion, less than 2% of the total, is slated for the Treasury's Capital Purchase Program. The rest is designated for propping up areas including money-market mutual funds and commercial-paper markets, and for purchases of asset-backed securities.

"In some parts of the financial community it's going to take a longer period than that, probably with AIG, too," Mr. Geithner said. "Realistically, this is going to take time."

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